Does Luen Wong Group Holdings (HKG:8217) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Luen Wong Group Holdings Limited (HKG:8217) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Luen Wong Group Holdings

What Is Luen Wong Group Holdings's Debt?

As you can see below, Luen Wong Group Holdings had HK$107.0m of debt at March 2021, down from HK$132.9m a year prior. On the flip side, it has HK$47.7m in cash leading to net debt of about HK$59.3m.

How Strong Is Luen Wong Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Luen Wong Group Holdings had liabilities of HK$126.2m due within 12 months and liabilities of HK$12.2m due beyond that. Offsetting these obligations, it had cash of HK$47.7m as well as receivables valued at HK$114.0m due within 12 months. So it actually has HK$23.2m more liquid assets than total liabilities.

This surplus strongly suggests that Luen Wong Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. But it is Luen Wong Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Luen Wong Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 53%, to HK$168m. That makes us nervous, to say the least.

Caveat Emptor

While Luen Wong Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$16m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Luen Wong Group Holdings has 4 warning signs (and 2 which are significant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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